Cyber Protection Strategies: Balancing Insurance and Security

Abstract

Firms employ various cybersecurity measures such as procedural controls, technical measures, and physical installations to mitigate and maintain risk at acceptable levels. The advent of cyber insurance has introduced a new dynamic, potentially discouraging self-protection due to coverage for losses. However, recent trends indicate a shift towards integrating cyber insurance into Information Technology (IT) risk management strategies. Cyber insurance can incentivize firms to optimally allocate security resources, particularly when premiums are tied to a firm’s security level. The availability and pricing of insurance coverage reflect an organization’s commitment to mitigating potential losses incurred from security breaches. This study examines the impact of cyber insurance on self-protection by developing an expected utility model that combines risk preference and utility theory. The model is contextualized within a monopolistic market scenario with mandatory participation, where organizations must purchase cyber insurance. This compulsion incentivizes firms to enhance their security posture to secure favorable insurance pricing. The study compares risk preferences across different scenarios, both with and without cyber insurance. Our findings show that premium discrimination affects agents differently based on risk preferences. Risk-neutral agents are more responsive to varying premiums, adjusting their investment in preventive measures accordingly. In contrast, risk-averse agents prefer to transfer risk through insurance rather than invest heavily in prevention. The study provides insights into firms’ risk management strategies, particularly regarding purchasing cyber insurance and selecting appropriate premium policies. By highlighting how incentive mechanisms like cyber insurance can align IT strategies with the overarching goal of safeguarding cyberspace, this research contributes to understanding behavioral aspects of cybersecurity practices. Moreover, the study underscores the importance of aligning insurance premiums with security investments to create a balanced approach to risk management. By doing so, firms can protect themselves more effectively and contribute to a more secure digital environment.